Some Austrian Thoughts on the Problems with Stimulus Spending

"Politicians who are structurally unable to know how best to allocate stimulus resources will inevitably distribute them to those persons and groups who will give them the most electoral support. The Austrian caution about the limits of politicians’ knowledge suggests that no matter what is drawn up on the blackboard, the politicisation of stimulus spending is not an accident and cannot be avoided. Stimulus spending that goes to groups that will provide the most votes will ensure that the right combinations of capital and labour will not be formed."

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Very interesting. It is a step in the right direction that articles like this get published at institutions like the LSE.
Not having very effective arguments against government solutions is part of the explanation; but I assume that the 'benefits' accruing to politicians,burocrats, rent seekers and extractors, trade unions, etc., probably explain more the demand for and the supply of the enlightened hand of the commanding hights.
Who benefits?

Great article. Even if one accepts that govt deficits help sustain growth and employment during periods of private deleveraginig, it still takes a leap of faith to believe politicians and central bankers will know where to direct funds productively. Policy proposals these days too often appear to take that leap.

A related point that many proponents of further stimulus in the US seem to miss is that income inequality has seemingly increased during the past few years. Hayek's caution on the limits of knowledge still does not get the respect it deserves.

Read just to section 2. My observations:
- VON hayek, VON wieser, VON boehm bawerk.
- in presenting the Austrian school, I see no Wicksell (I think he deserves a word, especially as to the treatment of interest rate by Mises and Hayek within the cycle)
- at page 4 I expected a note on the Hayek-keynes debate. no need?
- very good the part on rationality
- i have noticed emphasis on "horizontal" market, but no hints on resource employment along time (savings and investment). I know this could have made the paper too slow and it could be seen a bit out of topic, but stressing time dimension would be useful to appreciate Austrian theories (then I'll see whether it is relevant for the models)
- the first subsections on labour market are so good

Generally well put. One caveat I might note that is not so relevant to the EU but more so to the US is that generalized aid to state and local governments with the balanced budget rules is one way to provide some counter-cyclical stimulus without the federal government and its political leaders picking and choosing specific potentially rent-seeking winners, although that may go on at the state and local levels themselves.

Particularly in this recession in the US we have had the phenomenon that even as private sector growth and employment have been recovering (more rapidly in fact than in the last two recessions), public sector employment has continued to decline at a rate of nearly 100,000 jobs per year. Federal assistance to the state and local sectors in this circumstance would not necessarily fund boondoggle public works not really "shovel ready," but simply forestall further layoffs of teachers, police, and so forth.

As it is, the push to push Medicaid onto the states, and the push by many states to push required spending down to local governments (in VA the latest was removing state support but requiring local govts to pay for teacher pension funds) has turned into a massively irresponsible game of kick the can down to the lower levels of government.

Hey Krugman,
How much stimulus will be enough?
Where's the money from the stimulus coming from? What was the result of the last stimulus?
Did stimulus spending work for Japan?
Who decides how to spend the stimulus?
Are there any guarantees that stimulus will work?
What happens if stimulus does not work, then what?
Say stimulus was not big enough and repeat?

Better yet Krugman, can you put your Nobel Prize back in the crackerjack box and self deport.

"...provide some counter-cyclical stimulus..." Huh? "Stimulus" is basically where the cycles come from in the first place.

"...public sector employment has continued to decline at a rate of nearly 100,000 jobs per year." Really? At last--a silver lining.

"Federal assistance to the state and local sectors..." comes from where? The feds can give only what the feds have first taken. I have an idea: let the local levels of government set their own priorities, consistent with what they themselves can and are willing to fund. Let the feds limit themselves to what the Constitution assigns them.

I think that the problem with the Keynesian stimulus is not just the knowledge problem the politicians face as to where to allocate resources.

Keynes (and Krugman for that matter) seems to never have thought about what people save money for. For him it seems that they can hoard the money endlessly, watching the production progressively collapse up to the subsistence level.

For any subjectivist, this must be absurd on its face. People save money essentially because they value money they have higher than the goods they could have acquired with it at present.

The Keynesian stimulus, however, is supposed to increase the value produced in the economy through... paying newly printed (or borrowed) money to produce things that consumers wouldn't have demanded. This may even increase GDP in the short run but barring highly improbable scenarios, it can't increase value.

I understand many here think that any shrinkage of government at any level is wonderful, period. If you are an anachist, that is your position, but that point is also irrelevant to this issue.

I am unaware of anybody who claims that "stimulus" is "where cycles come from in the first place. Care to name anybody besides yourself? Sure, Mises and Friedman have both argued that monetary policy fluctuations have generated cycles, but I am unaware of either of them or anybody else I have ever read or heard of making this claim about fiscal policy.

Regarding your rather pollyannish argument about local governments (assuming you allow them to exist at all), the best they can do is plan according to some projections of their tax revenues, which depend on what happens to the economy given whatever tax rates they put in place. If the economy underperforms, as it has recently, then they must adjust by either raising taxes, or more likely, cutting spending and laying people off, thereby further dragging the economy down procyclically, which they have been doing.

BTW, for the record, this is the first recovery since WW II that has involved ongoing layoffs at the state and local government levels, although if one listens to the political rhetoric out there, you would have no idea whatsoever of this fact, whatever you may think about it.

Stimulus spending is something that everyone should know about. A normal citizen might not even know how it works, at least with this post we are given a glimpse of the situation and how stimulus spending should apply.

Why is pushing spending down to the local level an "irresponsible" game of "kick the can"? I read it more like a "kick the responsibility and costs closer to the people receiving the benefit and thus those with the knowledge and incentives to seek better performance out of the tax dollars spent. That's all to the good in general. The issues of inequality should be handled through as simple of a safety net as possible with direct cash support ala a guaranteed minimum income or negative income tax. Keep the administrative state as minimal and local as possible.